Deep Dive: A market that brings bad press

It has been a year of highs and lows for Pretium Partners. The New York-based manager closed the single-family rental sector’s biggest privatization, launched a $700 million joint venture with one of Canada’s biggest public pensions and became the second biggest owner of US rental homes. Since 2017, it has more than tripled its holdings to 66,000 homes.

Despite its accomplishments – or, perhaps because of them – Pretium has been a magnet for bad press. Reuters, Bloomberg, National Public Radio and other outlets have carried stories this year about its portfolio companies, calling their eviction and property management practices into question.

Pretium and its partner, the Los Angeles-based manager Ares Management, say the charges are wrong. But the coverage that dogs them has become standard fare for today’s rental home industry. A surge of institutional capital has brought greater scrutiny to the market, beyond the typical disputes between tenants and landlords.

Corporate owners of single-family rentals, or SFR, have been blamed for running up home prices, elbowing out first-time buyers and employing draconian tactics to secure payments from renters at a time of immense hardship for many. Accurate or not, such headline risk is enough to turn off some investors.

“We looked at it and just in general we couldn’t get comfortable with it as a good investment space for a number of reasons,” a chief investment officer of a US public pension tells PERE. The official requested anonymity to discuss investment strategy. “Part of it was, if you have to foreclose and kick people out of a house, what kind of press does that generate? It’s probably not good for us.”

Covid-19 has been a catalyst for the institutionalization of SFR, accelerating trends that fueled the prior decade of slow but steady growth. Chief among them is the imbalance between the supply of new housing and the demand for it. At the same time, the pandemic has added pressure to the strategy and allowed it to fall into the crosshairs of political snipers on both sides of the partisan divide.

“You need to bring a high-touch operating mantra to this asset class,” says Blackstone senior managing director Jacob Werner. “These are people’s homes and it gets extra scrutiny so we’re very focused on it. Our investments in this space get a lot of senior-level attention to make sure we’re managing them at an extraordinary level for our residents.”
Now, as SFR faces a reclassification from niche alternative to real estate portfolio staple, institutional investors must decide if the sector’s outsized returns are worth the risks that come with them.

Growing up

The SFR sector is bolstered by a US population migrating from city centers to suburbs. That shift began years ago and has been accelerated by the pandemic. The population growth rate for urban centers in US metro areas with one million or more people was -0.15 percent between 2019 and 2020, according to research from the Washington, DC think-tank, the Brookings Institute. Meanwhile, suburban parts of those same metros grew 1.03 percent. This represented the biggest divergence between the two population groups in more than a decade, but since 2011-12, suburban growth has been more than 1 percent annually, while city-center growth peaked at 0.99 percent and has fallen every year.

As a result of this movement, listed SFR companies have outperformed apartment REITs in four of the past five years, according to the trade group Nareit. Last year, the sector delivered a total return of 6 percent: lofty compared with -15 percent returns for apartments and -5 percent registered by the overall REIT market.

Rental homes also tended to have higher retention rates than apartments, PERE understands, and SFR owners have continued to grow rents during the pandemic, while the multifamily sector has had to slash prices. By the end of 2020, SFR groups were increasing annualized rent rates by 6 percent for new tenants and 4.1 percent for renewals, according to data compiled by the New York-based lending group Arbor Realty Trust. Meanwhile, rents in the apartment sector fell by 2.7 percent on the year.

Driving these trends, industry participants and observers say, is the maturation of the millennial generation. As more members of the cohort get married and have children, their demand for space increases and inevitably leads them to the suburbs. While many in this population are able to buy and others rent by choice, a significant segment simply cannot afford a home in their ideal zip code.

Pretium is one of the managers positioning themselves as a bridge between where people want to live and what they can afford to pay. Dana Hamilton, the firm’s senior managing director and head of real estate, said this approach has resonated with institutional capital.
“Investors like to invest into durable trends, and I don’t think anything is quite as durable as a shift in population,” Hamilton says. “We know this is happening. The millennial population is aging, they will form households, they need a place to live.”

SFR gold rush

Like stocks, collectables, cryptocurrencies and all other types of investable assets during the pandemic era, values of US homes have skyrocketed as yield-starved investors pour into the market.

During the second quarter of 2021, investors bought a record $48.5 billion of single-family homes in the top 50 US metros, according to the brokerage Redfin, bringing the year-to-date total to $87.4 billion. The group defines an investor as any institution or business that purchases a home instead of an individual.

Investors accounted for nearly 68,000 home purchases, or 16 percent of sales in the top markets, during the second quarter. These groups are largely paying cash and buying at the low-end of the market, Redfin finds. And they do not mind paying a premium to do so. While the median home-sale price in the US was a record $338,225 during the quarter, the average investment property sold for $439,600.

It is unclear how many of those homes were acquired by large SFR companies, those that own 1,000 properties or more. But the surge in property investment has coincided with significant capital outlays by private equity’s largest real estate managers, including Blackstone, Brookfield, KKR, Rockpoint Group and Ares Management.

In one noteworthy venture stateside, a single joint venture between Toronto-based sector specialist Tricon Residential, the Teachers Retirement System of Texas, Pacific Life Insurance Company and another unnamed investor committed to deploying $5 billion of debt and equity to purchase 18,000 rental homes over the next three years.

John Burns Real Estate Consulting, which tracks the space closely, has tallied at least $21.5 billion of institutional transactions and publicly announced commitments to SFR since March 2020.

While some groups continue to stalk multiple listing services to add homes one at a time, much of the large institutional activity seen in the past 18 months has focused on portfolio and platform acquisitions. Notably, Pretium and Ares closed on a $2.4 billion deal to take Georgia-based Front Yard Residential Corporation private in January, and in June, Blackstone agreed to acquire Chicago-based Home Partners of America in a deal that valued the platform at $6 billion.

How big is too big?

The confluence of these large capital commitments with a rash of stories about would-be homeowners being outbid by cash-wielding corporations has cultivated a narrative that such firms are cornering the market.

As a result, populist politicians on the left and right have taken shots at the role of institutional capital in the US housing market. Frequent industry critic Senator Elizabeth Warren, a Democrat from Massachusetts, calls it “another massive private equity real estate grab that wreaks havoc on families and communities.” Venture capitalist turned Senate candidate JD Vance says groups like BlackRock are turning the American middle class into a “permanent renter class.” BlackRock sold its only direct exposure to SFR, a minority stake in Home Partners of America, to Blackstone in June.

David Howard, executive director of the National Rental Home Council, an industry group representing SFR owners, says the numbers simply do not bear this out.

By the NRHC’s count, large SFR companies own just 1.16 percent of the 23 million-unit US single-family rental home market. The group also reports that, even in the states where SFR investment is heaviest – Georgia, Florida, Arizona, Nevada and North Carolina – rental homes companies only owned between 3 and 5 percent of SFR homes. In Georgia, where institutionalization runs deepest, such firms own less than 1 percent of the total housing stock.

The rental home sector still skews heavily toward smaller landlords, with nearly 60 percent of owners having just one or two homes and more than 80 percent having fewer than 10. Howard and others in the space say the main driver of institutional growth has been the overtaking of smaller operators rather than outbidding individual buyers.

“When you look at the numbers and peel back the data, you get a better sense for what’s really happening,” Howard says. “And that’s a lot of smaller owners getting out of the business and demand for rental housing starting to surge.”

Tim Savage, an economist and professor at New York University’s Schack Institute of Real Estate, says institutional capital is not driving the dynamics of the single-family market so much as it is responding to them. And he believes the engagement of large investors will improve the space in the long run. “The institutional trend is a positive trend because it tends to make markets more transparent,” Savage says. “We’ve seen that generally in finance for 50 years, and it tends to be a good thing.”

On the other hand, given their concentration in certain geographies and home types, corporate landlords are influencing market dynamics in at least some metros, Stijn Van Nieuwerburgh, a professor of real estate finance at Columbia University, tells PERE. The problem is quantifying it.

Private equity groups are focusing on markets that are already on the rise because of their proximity to jobs, schools and other amenities. Add in record low interest rates, demographic trends and a seismic shift in working from home, and it becomes difficult to discern the singular impact of institutional capital, Van Nieuwerburgh says.

“It’s a hard question to conclusively answer, it seems plausible that it could be impacting some houses and some neighborhoods,” he says. “But it is very hard to separate out the private equity role from all these other fundamentals that are changing.”

Covid conundrums

The pandemic has impacted the SFR space on several fronts, some more beneficial than others.

Primarily, it has accelerated the movement of urban renters seeking out more spacious accommodations. “When the pandemic hit, a lot of millennials said to themselves, ‘Maybe living in a city or apartment isn’t such a great idea; maybe now is the time to think about moving on and evolving,’” Gary Berman, chief executive of Tricon, tells PERE. “On top of that, you had a lot of people who became obsessed with space and safety, and if you want more safety and you’re concerned about health, being in a suburban, single-family home is the place to be.”

It has also created buying opportunities. Smaller landlords, unable to tolerate the revenue lost due to the various covid-19 related eviction moratoria, have exited the space, selling their portfolios up the food chain. But the moratoria have cut both ways, putting many SFR platforms in the spotlight for how they deal with tenants.

Industry watchdog group the Private Equity Stakeholder Project has chided Pretium and other groups for filing eviction notices during the pandemic. Citing county records, PESP says Pretium and its portfolio companies, Progress Residential and Front Yard Residential, made 1,300 filings during the first half of 2021, up from 400 filed in the last four months of 2020 and nearly as much as the next two biggest filers, Florida-based Ventron Management at 820 and the British Columbia-based multifamily specialist Western Wealth Capital at 744, combined.

The man behind the headlines

Ryan Dezember has tracked the institutionalization of single-family markets since the start

“The first couple years, at least, it was a curiosity,” Ryan Dezember tells PERE. But that changed with the merger of Starwood Waypoint Residential Trust and Colony American Homes in 2015. “They were consolidating, and it became clear they were going to run this thing as a business.”

The Wall Street Journal reporter has covered private equity for the past decade. Last year, he wrote a book, Under Water: How Our American Dream of Homeownership Became a Nightmare, chronicling the institutionalization of the housing market and his own ill-fated stint as an Alabama homeowner.

The book’s findings led to viral articles like the New York Post’s July 2020 offering: “How corporations are buying up houses — robbing families of the American Dream,” which still pops up social media.

One of Dezember’s pieces, “If you sell a house these days, the buyer might be a pension fund,” struck a similar nerve, sparking debates about the impact of growing rentership on the country’s wealth divide.

“That’s the big question,” Dezember says, pointing to research showing home ownership as the bedrock for middle class wealth creation in an era of wage stagnation. “We’re not earning a lot of money relative to inflation, so how do we make up the difference [if more people rent than own]?”

As for charges that SFR landlords treat tenants poorly, Dezember says: “The executives of these companies are very in-tune with their customer service reputations. They definitely don’t want to be bad guys.”

Jim Baker, PESP’s executive director, says this activity is troubling given the US Centers for Disease Control and Prevention’s nationwide eviction moratorium and the federal government’s distribution of $46 billion of rental assistance directly to property owners.

“It raises dramatic concern that the single-family rental landlords have been so quick to evict tenants in the middle of a pandemic,” Baker tells PERE. “And it raises substantial questions about how companies are acting in that space.”

Pretium’s Hamilton says the filings were made against residents who ignored repeated outreach attempts as an effort to elicit a response. She also notes that most filings do not result in the removal of a tenant from their home and the company did not file against tenants with formal CDC declarations of hardship, a key component of the federal moratorium.

Like other large SFR owners, Pretium has gone to great lengths to assist residents impacted by the pandemic, Hamilton says. It has offered rent forgiveness and repayment plans, provided relocation assistance and voluntarily extended its own eviction moratorium for tenants with a formal hardship declaration beyond the July 31 expiration. The group also added more than 20 staff members to assist with hardship cases. Overall, she says, institutional owners have been able to do more to help renters than smaller landlords.

“We have tremendous ability to do good,” she says. “We do amazing things in hurricanes and other situations, and I truly believe we’re doing extraordinary things in this situation as well.”

Those efforts have not kept Washington at bay. In July, a US Congressional committee launched an investigation into the pandemic eviction practices of Pretium, Invitation Homes, Ventron and Las Vegas-based Seigel Group. In letters to the four firms, the committee’s chair, Congressman James Clyburn of South Carolina, cited PESP’s findings about eviction filings.

Different kind of crisis

Institutional investment in SFR began in earnest after the global financial crisis, with private equity groups buying homes one by one at foreclosure auctions, often renting back to the former owners who had defaulted on their mortgages.

Blackstone amassed a portfolio that it took public as Invitation Homes, which remains the largest player in the space, with roughly 80,000 properties. Wayne Hughes, founder of the self-storage REIT Public Storage, dove into the space too, eventually securing a $600 million commitment from the Alaska Permanent Fund; that platform became American Homes 4 Rent, which owns nearly 54,000 homes today.

The groups played a critical role in bolstering housing markets after the collapse of the subprime lending industry, Van Nieuwerburgh tells PERE. The consensus among research done on that period, he says, is that early entrants into the space served as market makers – buying low, selling high and providing liquidity. “If they hadn’t shown up at these foreclosure auctions to the extent that they did, the prices of these homes might have fallen even further than they did,” he says. “That might have had all kinds of ripple effects like pushing households deeper under water, making the mortgage crisis deeper.”

The more recent wave of investment into this space, which began five or six years ago, has not been widely researched, Van Nieuwerburgh adds, so its net impact remains to be seen.
What is clear, however, is the difference between the current crisis and the one that preceded it. From 2005 to 2007, 4.8 million new single-family homes were delivered in the US, the biggest three-year stretch on record, according to the US Census Bureau. Since then, the market has yet to see one million new homes added to the market in a single year.

Investors undecided

Such a dearth of new homes being built has made eviction practices by the companies owning existing stock a more sensitive issue. In June, Alyssa Giachino, a PESP representative, used the public comment section of the California Public Employees’ Retirement System’s investment committee meeting to flag the eviction practices by SFR companies Progress Residential and Pretium and Ares-owned Front Yard.

“Ares Management’s failure to address or even respond to questions about its company eviction practices represents a significant management failure on Ares’ part, one that CalPERS should be concerned about given its recent investment of $1.3 billion,” she said.
CalPERS does not invest in Ares’ real estate funds, though it has a substantial partnership with the firm’s private equity platform. Still, Giachino’s comments were enough to get Theresa Taylor, chair of the system’s investment committee, to request the pension’s private equity team follow up with Ares. CalPERS declined to comment on what came from that conversation.

Canada’s Public Sector Pension Investment Board has not been deterred by the negative press around the SFR space. The $160 billion pension investor inked a $700 million joint venture with Pretium this year.

“In a time when the price of homes continues to increase across the United States, the single-family rental industry provides people, most notably millennials or young couples starting a family, the option of a home, a yard and a standard of living that is now attainable,” a PSP Investments spokesperson tells PERE.

“I don’t love that the press is negative. I would rather it be positive press. But it does give us the opportunity to set the record straight”

Dana Hamilton
Pretium

Others are less sanguine about SFR. The Oregon State Treasury, for one, has reservations about attaching its name to a venture in the space. Anthony Breault, senior real estate investment officer for the state’s pension plans, says his team was exploring a programmatic approach to the strategy in 2019, but the pandemic changed the context of the market.

“With the sheer volume of capital forming in the space in 2020 and interest from so many other participants, as well as the social dynamic of housing affordability and scarcity across much of the country, we decided to postpone a dedicated structure until such time as we can better assess the long-term risk and operating profiles that will best complement our portfolio,” Breault tells PERE. The state still has exposure through diversified funds and it remains open to a designated commitment in the future.

Ben Maslan, managing director of the consultancy RCLCO, points out that investing in SFR has gotten easier as participation in it has increased. “For risk-averse investors, the space has now become less risky because more peers are doing it,” he says. “You’re not walking out on the ledge as a first mover.”

The rental home industry is rife with contradictions. Some claim it as an affordability play, offering access to homes and neighborhoods that would otherwise be out of reach. Others say it is further exacerbating the shortage of entry level homes for sale, thus worsening America’s yawning wealth gap. Both can be correct.

As the space becomes more institutional in nature and continues to find itself in the spotlight, Hamilton says it is important to use those opportunities to educate the public on the nuances of the industry.

“Media cuts two ways,” she says. “The media about SFR creates more knowledge about SFR. People understand that this is mainstream. I don’t love that the press is negative. I would rather it be positive press. But it does give us the opportunity to set the record straight.”

For more on this topic, read “Three alternative approaches to institutionalizing SFR.”